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Williams to Boost E&P Spending in '05 by 26%; Sees Powder River Gains

Taking advantage of continuing high natural gas prices, Williams said Tuesday it will boost its exploration and production (E&P) spending next year by 26% to not only increase production, but also bulk up probable and possible oil and gas reserves, which are now estimated at more than 4 Tcf.

CEO Steve Malcolm and his management team laid out the E&P unit's ambitious program to update the investment community on Tuesday. Higher gas prices, he said, make it the right time to invest in the future.

"We've had significant growth in our E&P segment production," said Malcolm, "and we expect to have significant organic growth from our existing positions," which are centered in the Piceance, Powder River, San Juan and Arkoma basins. Williams is now focused "on shifting from turnaround to growth and value creation. Obviously, given the progress we have made, we are thinking more and more about the future and growth."

The "near-term story," he said, is in Williams' holdings in the Piceance Basin, which holds 53% of the company's proved, probable and possible reserves. The basin also accounted for 58% of proved reserves at year-end 2003, and it has an estimated nine to 10 years of drilling inventory.

Another strong producer, Powder River, also has a nine-to-10 year drilling inventory, and it holds about 20% of Williams' proved, probable and possible reserves. It accounted for 10% of proved reserves at year-end 2003, but it has seen its production volumes falter about 4% this year.

Ralph Hill, senior vice president of E&P, blamed the Powder River production decline on regulatory delays in the region, but he said relief for operators is anticipated in the near future.

"We believe the [Powder River] basin is ready to roll again," said Hill. "It's been stalled the past two years basically because of regulatory issues, which curtailed a lot of activity not just by us in the basin. We have been stalled, but before the stall, the overall growth rates were certainly phenomenal, about 85% compound growth rates."

Even with the decline in Powder River production, Williams' E&P segment still saw its oil and gas with volumes increasing overall about 18% since the beginning of 2004. In the third quarter, average daily production from domestic and international interests was approximately 582 MMcfe, compared with 494 MMcfe at the beginning of the year.

"We're in a key area for U.S. natural gas development," said Hill. "While our current portfolio allows us ample development opportunities over the next decade, our drilling expertise in tight sands, shale and coalbed methane puts us in a great position to expand our business."

Williams will spend between $500-575 million in capital expenditures in 2005 on E&P, which is expected to deliver between $400-475 million in segment profit. The company also plans to expand its core areas through "bolt-on" acquisitions and farm ins.

Along with a previously announced estimate of 2.7 Tcf of proved reserves at year-end 2003, Williams now pegs its proved, probable and possible reserves at more than 4 Tcf. The Securities and Exchange Commission only allows companies to state proved reserves in their filings; probable and possible reserves are estimates based on geological and engineering data, but with reduced levels of certainty.

Merrill Lynch analyst Sam Brothwell raised the price objective on Williams to $21 from $15.50 "to reflect what we believe is under-appreciated potential in Williams' Rocky Mountains E&P business, as well as increasingly robust valuations in the pipeline sector." The Rockies, wrote Brothwell, "are the last frontier for new onshore gas in the Lower 48 states."

The analyst said that Williams historically has been valued as a pipeline company, "and that remains a solid core business, with some of the best assets in the industry." Williams' "often overlooked midstream business, also mainly in the growing Rockies, is also seeing rapid growth, and we believe warrants multiple expansion as well. But the big growth kicker is the drill bit. Long-term, we think WMB may have 3 Tcf of development potential....Rockies gas has finally come into its own as a serious growth story, and WMB's strong position there isn't being reflected in its share price."

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